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Sparking friction, China steel exports reinforced by rebate

October 30, 2014

China has boosted exports of steel qualifying for a generous tax exemption to some Asian countries, triggering accusations that mills in the world's biggest producer are taking advantage of the rebate to sell surplus steel cheaply.

The steel in question contains boron, an element that can harden steel for uses ranging from agricultural tools to mining, and receives less export tax under China's efforts to promote higher-value steel.

But steel makers in countries such as India say that a minimal amount is being added to the steel to benefit from the rebate and have urged their governments to take action, concerned cheap imports could force some mills out of business.

"It's yet another big loophole and people are grumbling, rightly so," said Jeremy Platt, an analyst at steel consultancy MEPS.

Chinese mills can get an export rebate that is five times greater than the cost of adding just 0.0008 percent of boron to a tonne of steel.

Adding such a tiny amount did not alter the use of the steel but classed it as a special or alloy steel that could be sold more cheaply because of the rebate, said Platt.

Sensitivity has increased as China's overall steel exports last month hit a record high. In the first half of 2014, boron alloy steel exports were 11.58 million tonnes, or nearly 30 percent of total, according to a government report.

Steel exports were likely to reach a record high of more than 80 million tonnes this year, the China Iron and Steel Association (CISA) said on Wednesday, while domestic steel consumption was down nearly 1 percent in the first nine months.

Li Xinchuang, vice-secretary general at CISA, said that Beijing was not subsidising the steel industry, but further jumps in exports risked creating problems so there was a need to find a reasonable resolution.

"There are countries around the world that are very unhappy, but the customers are very happy," Li told a conference in Tianjin last week.

Another CISA official said some rebates were halted from July and by year end the government would publish a new list of steel products eligible for rebates.

Faxed questions seeking comment from China's customs department were not responded to and a series of calls to the country's tax administration on the issue were not returned.

DUMPING?

In 2011, the U.S. Department of Commerce ruled that Chinese exports of cut-to-length carbon steel plate which contained minute amounts of boron were subject to anti dumping duty after U.S. steel makers led by Nucor Corp complained.

By adding boron, mills can get a 9 percent export rebate for alloy steel coil, while steel plates enjoy a 13 percent rebate of the value-added tax.

"They are adding a little bit of boron and calling it alloy steel," Seshagiri Rao, joint managing director at JSW Steel, India's No. 3 steelmaker, said, describing this as dumping and adding that he had raised the issue with the Indian government.

Rao said China was exporting surplus steel below India's production costs at times, although did not provide evidence of dumping, often defined as when a country exports at prices lower than in its domestic market.

India's Maharashtra state's steel sector was on "the verge of closure" due to an inability to compete, according to a letter seen by Reuters to a government trade agency from a steel association in Maharashtra in July.

India saw a 21 percent rise in steel imports in the first five months of its financial year, mainly from China.

In Japan, Chinese imports of special steel, excluding stainless steel, surged 177 percent to 523,652 tonnes in January-August over the same period last year, according to the Japan Iron and Steel Federation.

"We've told Chinese government officials last month about our concern that boron-added steel from China was flowing into overseas markets at low prices and causing trade frictions," said Takanari Yamashita, director of iron and steel division of Japan's Ministry of Economy, Trade, and Industry.

INCENTIVES HIGH

The cost of adding 0.0008 percent boron is only about 50 yuan ($8.18) per tonne, but rebates are five times that. Based on spot prices of about 3,400 yuan a tonne for alloy steel coil, mills could gain around 260 yuan from the export rebate scheme.

There has been speculation that China may end the favourable treatment, though some analysts say it may opt to increase customs checks as removing rebates completely would hurt mills that have genuinely moved up the export value chain.

China's overall steel product exports rose 40 percent to 65.3 million tonnes in the first nine months, as a slowing economy cut local demand, although still a fraction of total output which is set to top 800 million tonnes this year.

South Korea was the top market for China's January-August steel exports, followed by Vietnam and the Philippines, according to the International Steel Statistics Bureau. India and Japan were among the top 20 markets.

South Korean producers were concerned about boron in Chinese steel shipments, but no official action was planned, a spokesman at the Korea Iron and Steel Association said.

Ian Roper, commodity strategist at CLSA, said imposing taxes may be the only way to slow shipments.

"I don't see how Chinese exports fall near term, not until they've dragged down global steel prices first," he said.

($1 = 6.1153 Chinese yuan)

(Additional reporting by Krishna Das in New Delhi, Fayen Wong in Shanghai, Meeyoung Cho in Seoul and David Stanway in Beijing; Editing by Ed Davies)